Helping Clients Navigate Through a Variety of Registration and Licensing Requirements
The US Securities Exchange Act of 1934 (the “Exchange Act”) defines a broker as “any person engaged in the business of effecting transactions in securities for the account of others.” Definition of a dealer covers a person that is “engaged in the business of buying and selling securities for his own account, through a broker or otherwise” but excludes persons who buy or sell securities for their own accounts but not as part of a regular business. Entities as well as individuals may be considered broker-dealers.
Broker-dealer definition is interpreted very broadly. Any intermediaries in securities transactions generally fall within the definition of a broker and must register as a broker with the SEC. They must additionally join a self-regulatory organization (such as FINRA or a registered national securities exchange).
Every ATS and crowdfunding platform will face broker-dealer issues as it will very likely be assisting in sales of securities, which may require registration. The registration process is meticulous, and a registered broker-dealer is subject to numerous compliance requirements and obligations.
We advise on a broad range of broker-dealer registration issues, including:
- Registration as a broker-dealer;
- Possible structures alternative to broker-dealer registration;
- Regulatory compliance of a broker-dealer, including risk assessment, supervisory and reporting requirements.
Online trading platform that directly or indirectly offers services related to digital tokens and that does not meet the definition of a stock exchange under the US securities laws may qualify as an ATS. Most platforms providing a marketplace for digital tokens fall squarely within the definition of an ATS.
Regulation ATS requires that an ATS must also register with the SEC as a broker-dealer, become a member of a self-regulatory organization (SRO), such as FINRA, and file an initial operating report.
ATS registration process includes voluminous submissions to the SEC, including information about ATS’s traded securities, subscribers, operating procedures, etc. After registration, an ATS will have to comply with ongoing reporting requirements and obligations. As broker-dealers and FINRA members, ATSs are subject to strict standards of due diligence.
Funding Portal Registration
As an alternative to broker-dealer registration, crowdfunding platforms facilitating offers and sales of securities under Regulation Crowdfunding have an option to register as a funding portal. Registration process for funding portals is less onerous than for broker-dealers, but registered funding portals are still subject to similar compliance requirements.
In addition, there are certain limitations on the activities of a funding portal compared to a registered broker-dealer. Funding portals that are not owned or operated by broker-dealers are prohibited from:
- Offering investment advice or recommendations;
- Soliciting purchases, sales or offers to buy securities;
- Compensate employees, agents, or other persons for such solicitation based on the sale of securities displayed or referenced on the platform; or
- Hold, manage, possess or otherwise handle investor funds or securities.
Money Transmitter Licensing
With limited exceptions, any business that accepts and transmits funds, including any value substituting for currency, may require registration a money transmitter, which is a part of a broader category – MSB. While registration on a federal level is relatively straightforward and fast, the MSB legislation is not harmonized; all 50 states and US territories can have their own regulations, requirements and exceptions for money transmitter licensure.
The licensing requirements vary but usually include registration with the Financial Crimes Enforcement Network (FinCEN), background checks, application fees, security (surety bond), maintenance of permissible investments, minimum net worth.
Because of the lack of consistent regulation, companies tackling the US market must develop a comprehensive strategy getting licensed to operate as money transmitters. Dilendorf Khurdayan helps clients develop the plan and strategy for obtaining money transmitter licenses and guides the clients though myriad of requirements that differ from state to state.